Mexico

Mexico

Latin America Focus: Latin America goes full speed ahead

1 October 2009

All eyes may well be on Brazil next month as the industry waits with baited breath for the outcome of its wind project auction, but Mexico's market has started marching on with gusto, while in Chile things are starting to heat up at last.

Wind project development is continuing at a solid pace across Latin America, with Mexico and Chile now staking a claim alongside Brazil as the most promising markets in the region. Indeed, Mexico is rapidly commercialising one of the most concentrated wind sites in the world and is expected to reach an installed capacity of 400 MW by the end of the year, up from just 88 MW at end 2008. In Chile, which still lacks serious megawatts in the ground, sky-high power prices are driving a new boom in activity.

But Brazil remains the top market in Latin America, with the best incentives to build wind farms. The government's Programa de Incentivo a Fontes Alternativas de Energia Eletrica (Proinfa) support programme, which offers long-term power purchase agreements for projects, has fuelled the sector's growth from 336 MW installed at end 2008 to a forecast 900 MW by end 2009. According to Jorge Lima, a renewable energy specialist at state utility Eletrobras, it will have delivered between 1100 and 1200 MW when it ends in December 2010. "After a slow start, Proinfa has made good progress," he says.

Up for Auction

As Proinfa draws to a close, all eyes are on the government's separate support plan to auction off contracts to build a further 1 GW of wind capacity. The auction takes place on November 25. Developers have been clamouring to participate, says Pedro Perrelli, president of Brazilian wind energy association Abeeolica. The level of interest shows just how much potential there is for wind power in Brazil - developers proposing some 441 projects totalling 13.34 GW across 11 states have registered, according to Empresa de Pesquisa Energetica (EPE), the agency responsible for managing the auction. "Nobody expected such as huge response," says Perrelli.

Brazil's north-east accounts for 322 (9.54 GW) of the registered projects, while 111 projects (3.59 GW) are in the south. Those that have registered vary from Brazil's massive state oil company Petrobras and mining giant Companhia Vale do Rio Doce to Portuguese energy company Energias de Portugal, Australian developer Pacific Hydro, Argentinian turbine manufacturer Impsa and local company Servtec.

Hurdles remain, however. New tax levies on wind equipment imports have stirred up major concern, while registration of wind projects is just the first stage in qualifying for the final bidding stage. Every developer must now supply documentation proving they can finance their projects. This will force smaller, less professional projects out of the race for energy contracts altogether, even though Steve Sawyer, executive director of the Global Wind Energy Council (GWEC), says there have been no problems financing projects in Brazil so far, despite the global financial downturn. This is because the main financier for wind projects in Brazil is the state-owned Brazilian Development Bank. "I'm sure they're not impervious, but they're less susceptible to the commercial lending market than most commercial banks," says Sawyer.

Meanwhile, EPE is expected to set a fixed ceiling price cap for wind projects built under the auction, just as it has in previous government-run auctions for biomass projects, says Bernardo Bezerra, a project manager at energy consultancy PSR. This price cap will be unknown until the auction takes place. The lower the price falls, the fewer entrants will remain in the auction, and if the price is too low, it could see a complete exodus of all applicants, as happened with a similar auction in June 2007, when the BRL 140/MWh ($76/MWh) price was deemed too low by the industry to support wind projects and all participants bowed out before the bidding even started (Windpower Monthly, July 2007).

Hopes are high the government will get it right this time. Lima estimates that most major wind operators with projects above 20 MW can work with a price ceiling of BRL 175/MWh ($95/MWh). "But if the government makes a mistake on the price, they'll throw away years of effort," he warns. Abeeolica says prices will need to be higher, at around BRL 210/MWh ($114/MWh).

According to Bezerra, on the day of the November auction, EPE will offer prices for energy through an online process, with prices falling as the auction progresses. Developers bidding for a certain price level must say how much energy they want to sell, but can still bid again later at a lower price for a different project. However, the government has not said how many megawatt hours it aims to support, only that the contracts will be limited to supporting around 1 GW of installed capacity. The trade-off risk in waiting for lower prices is that the threshold for power contracts up for grabs could be fully subscribed by a certain price point earlier in the day.

If there are too many bidders, EPE will gradually decrease the price until the number of offers match the amount of energy needed by the energy utilities. The winning bidders will receive 20-year power purchase agreements (PPAs) with Eletrobras. Once the PPAs are signed, heavy penalties will exist for the suppliers if they do not meet the contractual obligations, says Bezerra.

Mexico moves

Meantime, Mexico is revving up. The country looks set to reach around 400 MW of installed wind capacity this year, even though few incentives are on offer to support wind farm development. But what Mexico lacks in direct incentives, it makes up for in its world-class wind resources concentrated in the Isthmus of Tehuantepec area to the south near Oaxaca. The narrow mountainous range separating the Pacific Ocean from the Gulf of Mexico creates a great difference in pressure between each side that forces the wind through the 59,000-hectare pass like a wind tunnel. "There's a draft of wind coming from the north basically on a permanent basis all through the year," says Eduardo Zenteno, president of Asociacion Mexicana de Energia Eolica (Amdee). "We've identified this so far as one of the greatest sites for wind generation in the world."

Average annual capacity factors in the Oaxaca region range from 38 to 42%, well above the 30 to 35% average capacity factors seen in Europe and the US. This translates into a higher relative output per megawatt, says Zenteno. "The same megawatts in Oaxaca are producing about 20 to 25% more power than the same megawatts in California," he says. "That's why we can make economically feasible projects with a lack of incentives."

The wind industry is on track to build 2500 MW in this one area of Mexico alone in the next few years, says Zenteno. Major projects include the 250 MW Eurus wind farm being built by Spain's Acciona, with around 220 MW of it completed as of October. American turbine manufacturer Clipper Windpower has installed the first few units of a 27-turbine project developed by EDF Energies Nouvelles. This is the first deployment of the company's 2.5 MW turbines outside the US. Spain's Gamesa is also building a 26.35 MW wind farm.

The big picture is impressive, says Zenteno. "We have capacity for more than 7000 MW in Oaxaca but don't have the infrastructure to accommodate that energy so far," he says. A transmission line, spanning 145 kilometres and able to accommodate power from 2500 MW of wind projects, is being built to bring the power from Oaxaca projects to the market. Through Amdee's negotiations, a so-called open season transmission funding process was initiated, resulting in seven wind developers teaming up to provide $250 million in letters of credit to Mexico's power company, Comision Federal de Electricidad (CFE). The money acted as a down payment on the construction of the transmission line. CFE has also agreed to part-fund and build the line and an associated substation. Under the deal, 400 MW of the line's capacity is being reserved for CFE wind projects and the rest for the remaining developers, mostly Spanish companies. Overall, 80% of the line will be paid for by the private developers and 20% by CFE. "That will make the biggest cluster in the world for renewable energy in one single point," says Zenteno.

The majority of Mexico's wind projects are arranged under so-called self-supply agreements, involving bilateral deals between big energy consumers and wind developers. Under the Mexican constitution, private investment in power generation for general supply to the national grid is not allowed. "Mexico has some of the best wind resources in the world, but I'm also often told one of the most heavily entrenched national utility monopolies anywhere," says Sawyer. "It has a constitutional obligation to provide least-cost electricity to the country, which has been relying purely on their indigenous petroleum resources. Being a state-owned utility, they get very low prices which has made it difficult to compete."

A 1994 law allows for contracts to be made between private developers and major energy users, however. Under this law, the power does not need to be fed directly to the end-use partners. It can connect to the central Mexican power grid as long as it equals the amount of power used by the energy user involved. In this respect, Acciona's Eurus project is a partnership with Mexico's global cement producer, Cemex, while power from the EDF Clipper 67.5 MW project is being sold to America's Walmart Corporation. These self-supply deals are the only way commercial wind can get built in Mexico, says Pablo Gottried, head developer for Fuerza Eolica S. de CV, which has a wind project in late-stage development in Oaxaca and more in early stages in Baja, Mexico.

All the Oaxaca projects benefit from an additional financial boost through the United Nations' Clean Development Mechanism (CDM). CDM allows an industrialised country with emission reduction commitments under the Kyoto Protocol to partially meet those reductions by purchasing certified emissions reduction credits from renewable energy and other projects in developing counties. CDM has had mixed success supporting wind projects throughout the world, (Windpower Monthly, October 2007), but it is backing every major new wind project in the Oaxaca region, says Gottfried. Some projects are fully CDM certified, while others are in the review process but are expected to get final approval. How much CDM revenue is generated by Mexico's wind projects is not clear, adds Gottfried. But, he says, is it is essential for pushing the projects into positive economic territory.

The Baja area in Northern Mexico also holds significant promise for getting major wind megawatts feeding power into Southern California (Windpower Monthly, April 2009). But the area is widely considered too difficult for development at present, so no projects are expected anytime soon.

Chile warms up

In 2004 Argentina suddenly decided to cut off its gas supplies to Chile. Prospective wind developers in Chile have that decision to thank for their potential business. Having been previously reliant on natural gas from Argentina as the mainstay of its power supply, Chile has been forced to turn to wind and other renewables instead. "We found ourselves in a perfect storm and no time to develop (gas) projects," says Cristobal Garcia-Huidobro from wind developer Centinela. Power prices have risen steadily, averaging around $133/MWh earlier this summer. "The price almost tripled in five years. For the first time, renewables emerged as an attractive alternative," says Garcia-Huidobro.

A new renewable energy law was passed in 2008, requiring utilities owning more than 200 MW of capacity to source 10% of their generation fleet from renewables. "We could see 2000 megawatts of wind in the next five years," says Garcia-Huidobro, although there are some challenges to be overcome. The renewable energy credit system underpinning the market is still poorly defined and greater transparency is needed, he says. And there are significant transmission challenges in getting the wind from distant locations to the population centres on the coast. Further, a lack of knowledge and experience at the local level creates delays in processing environmental permits for wind projects. "But these are minor barriers and we are seeing a lot of activity in Chile," he says.

Spanish giant Endesa, through its unit Endesa Eco, is the leading wind developer in Chile. Last month it completed the 12-turbine first stage of its 60 MW Canela II wind farm. The EUR150 million project will use 40 Acciona 1.5 MW turbines in total - the remaining turbines are expected online by the end of the year. The nearby 18.15 MW Canela I project has been operating since December 2007. Other developers are also busy putting up meteorological towers and planning potential projects, including Ireland's Mainstream Renewable Power, Australia's Pacific Hydro and SN Power Chile.

"I hope it will work out," says GWEC's Sawyer. "Paying $0.40/kWh for the diesel generator sets means that, price-wise, wind can easily compete if you can get the permits and navigate the labyrinth of the Byzantine electricity system." In theory it should be a good market, he adds. "But we'll wait and see if one those big projects gets built and connected before we announce they are open for business."